October 24, 2020

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Time to put economy on COVID-19 pause

Hey there, time traveller!
This article was published 13/4/2020 (194 days ago), so information in it may no longer be current.

Opinion

COVID-19 is simultaneously a health and economic crisis. If we do not flatten the curve, or if a second wave of illness emerges as social distancing eases, disease impacts may well extend into the summer and even further into the fall, with a possible repeat cycle starting by December.

Public-health alerts have dominated the news cycle. However, economists have long understood the critical importance of the social and economic determinants of health. COVID-19 is set to create a recurring domino effect of economic malaise, followed by broader health crises that will worsen the economy even further.

So far, governments have treated the economic impact of COVID-19 as if it were a conventional demand-side collapse such as the Great Recession (2007 – 2008) or the Great Depression (1929 – 1938). Governments have committed to dramatic increases in spending on existing programs and created new ways to funnel money to workers and businesses. First, let’s look at the existing policies for combatting recession.

Monetary policy is the first line of defence to combat recession — the Bank of Canada has reduced interest rates to almost zero and committed to a range of asset purchase programs to support the mortgage market and short-term government debt. However, most economists have lost faith that monetary policy remains effective.

Second, the so-called automatic stabilizers, such as Employment Insurance, would normally do their share in combating a recession. With one-million-plus Canadians applying for EI benefits, about $550 million could be injected into the economy each week. But the EI program was never designed to accept a million applications in a week; it is bogging down, so cheques will not flow soon.

Third, while increasing the benefits of existing programs such as the child benefit is easy, a problem with much of governments’ economic response to COVID-19 is that new initiatives such as launching a mortgage purchase program or the new emergency benefit program require months to create. With public-sector workers also falling sick and increasingly working from home, these new initiatives will roll out slowly and incompletely, suggesting that the massive subsidy for business or support for individuals are unlikely to flow before mid-May.

Some jurisdictions and private-sector companies have implemented selected elements of a more radical policy. British Columbia has banned evictions and rent increases. Some banks are promoting mortgage payment deferrals for households, which were always available provided the borrower could offer a reason, usually job loss. However, these scattered measures are grossly insufficient.

What we need now is a nationally mandated COVID-19 "pause" on mortgage payments, rents, property taxes, car, consumer and business debt, and utilities for six months. When and if the economy stabilizes, rents, utility and other taxes would be repaid using low-interest loans. Government would create loan guarantee programs to support lenders who finance the repayment. Deferred mortgage payments are simply added to the total amount owing.

Those who continue to receive income would not use these deferrals, simply because the repayment process is more costly than paying bills on time. This pause is definitely not a program to allow shirkers to avoid their obligations.

A national pause on the payments that comprise the bulk of recurring payments for households and business (not wages, of course) has two key benefits: first, it will relieve the immediate pressures of economic survival and make the public health directives more palatable and enforceable, especially as we head into May and June. Second, while we need new spending programs, the "pause" reduces the financial obligation and the pressure on rapid and probably sloppy implementation. It gives breathing time to design things properly.

The COVID-19 "pause" defers a whole range of payments up the economic food chain — from minimum-wage renters to landlords to municipal governments to utilities and to provincial governments. This would rapidly create a tidal wave of debt, underwritten by all orders of government and corporations.

Now at some point, the buck must stop. Or must it? This is where modern monetary theory rides to the rescue. Roundly condemned by leading economists, this theory argues that countries that have control over their currency can massively increase the credit limits of business and government. We need to print electronic money or more correctly, the Bank of Canada must purchase government and corporate debt – the asset purchase program – at levels that we have never seen.

Right now, government must assure Canadians who face bills they cannot pay, that they will not lose their homes, cars or other possessions. Public order and our collective mental health depend on Canadians believing that government has the capacity to back stop the COVID-19 crisis. It has, if only it would recognize it.

Many will think a COVID-19 "pause" as economic madness, and in normal times they would be right. But in mid-January as I was lecturing to my class, 50 per cent of whom come from mainland China, had you told me I would be writing this during a lockdown that could last until into the summer, I would have deemed you mad. The COVID-19 pause I describe would fill the economic hole while we flatten the infection curve.

Gregory Mason is an associate professor of economics at the University of Manitoba.

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